Koreans Love to Blame Foreign Speculators
You can easily find that Koreans based in Korea often blame foreign speculators for the volatility of Korean markets and assets in general. In the Korean press, you will be able to find not-so-subtle articles which suggest that foreigners are responsible wild gyrations in asset prices. Sometimes, the blame rises to a fever pitch, and political decisions get made which are totally unjustified when you apply internationally accepted norms. Not norms only accepted by the U.S., but by the global community as well. As Korea matures into a first-world country, these political decisions are not favorably received by the global community. The Seoul Gyopo Guide has pointed out, on multiple occasions, that the KEB debacle was completely unjustified, and motivated by political whim only. The reality is that over the past few years, Korea has benefited greatly from foreign speculators' movement of money around the world.
Korea Has Benefited a Great Deal Because the Yen is Strong
For those that have read the Seoul Gyopo Guide in the past, this headline is no surprise. Korea has feasted on one simple fact: the Japanese Yen is very strong, for a number of reasons, and that has made Japanese products too expensive in the international marketplace, and in many cases, has severely hurt Japanese company profitability. Toyota, Sony, you name it, they have been hurt by Japanese Yen strength. Who has benefited? Hyundai-Kia and Samsung Electronics (and others). We can debate this or that feature but the fact is that these products by Japanese and Korean companies are very competitive with each other. The reason that has occurred is because Korean companies have used their gains in the international marketplace to improve the quality of products produced. Those gains were the result of the fact that Korea's products were cheaper compared to Japanese products due to the JPY/KRW exchange rate. Twenty years ago, no one would compare a Sonata with an Accord. Today, that is very much the case. Korea has the strong Yen, in no small part, to thank for that.
Why is the Yen So Strong If Its Economy is in Decline?
There are a large number of reasons for this and too numerous to completely analyze here. However, here are a few. First, Japan has an economy where its debt, though very large, is largely owned by the Japanese. As a result, you don't have foreign investors selling Yen-denominated securities every time it is more clear that the Japanese debt burden is large. The ratings agencies have downgraded Japan recently. The Japanese Yen didn't move appreciably. Second, the stability of the debt, coupled with the stagnant Japanese economy, has led to the "Yen carry trade." It has allowed foreigners to convert into Yen, and then pay back the Japanese interest rate, which has remained close to zero because of the stagnant Japanese economy. So, when there is increased risk around the world, investors convert their currency into Yen. That is exactly what has occurred over the past week, and over much of the past few years, as governments around the world have borrowed money from foreign investors. Where has that not occurred? Japan. The result, the Yen, which should otherwise be weak, has remained strong relative to other global currencies, and the Korean Won.
The Korean Won / Japanese Yen FX Rate Hasn't Moved
In fact, the rate as of this writing is approximately 13.6. Before the financial crisis hit, that rate was around 8.0. Amazingly, the Korean Won has actually weakened compared to the Japanese Yen since the beginning of 2010. That has been to Korea's corporate benefit. The reason that there are so many more Japanese and Chinese tourists around Myung-Dong? Korea is cheap compared to their own markets.
Now, part of this is explained by the Bank of Korea's intentional policy. The BOK has a difficult task, because a weak Korean Won has caused increased inflation. For example a Korean Won can buy fewer imports because the import is priced in its own currency. It isn't all good news that the Korean Won has not strengthened greatly against foreign currencies. Nevertheless, the idea that foreign speculators are to blame is a misguided notion.
Conclusion
The Lost Seoul is qualified to write in-depth posts around this topic but is more interested in the central theme: Korea will have to deal with the effects of joining the elite nations of the world. Critics of the government and policy makers will need to take this into account before throwing out inaccurate statements and criticisms which no longer apply. The rules of competing on a global playing field, with and against competent, global competitors are not easy to manage, nor should they be. Old-fashioned thoughts and criticisms applied when Korean companies did not make world-class products. Old-fashioned criticism against the government don't work because while Korean products are world-class, the restraints of small population, small geographic size, and lack of natural resources are unique to Korea when compared to Germany, Japan, and the U.S. As a result, policy must take this into account, and critics must as well.
These are "high-quality" problems. A "high-quality" problem is one that occurs because Korea has successfully used the past few decades to make unprecedented progress on the global economic stage. Other "emerging market" countries have not had to deal with the same restraints that Korea has faced and overcome. Brazil? Enormous amounts of natural resources. China? 1.4 Billion people. India? 1.1 Billion people. Foreign speculators are not the root of the problem: the issue is that Korea faces unique challenges as it stares down Toyota, Siemens, and Ford on the global stage. Blaming foreign investors as wild speculators have actually created Yen appreciation, which has, and continues, to benefit Korea.
Showing posts with label $JPY. Show all posts
Showing posts with label $JPY. Show all posts
Friday, February 25, 2011
Wednesday, February 16, 2011
Criticism of the BOK's Decision is (Largely) Unfounded
The Bank of Korea Has Taken Criticism for its Recent Decision
The other day, the Bank of Korea (BOK) kept its target interest stable, which was different from market expectations. Market participants widely believed that another rate increase would occur. In the Wall Street Journal's Korea Blog, it was reported that the Bank of Korea has received a great deal of criticism about this most recent decision. The Seoul Gyopo Guide believes that over time, interest rates must increase in Korea. However, the criticism for the most recent, one-time decision, is unfounded because the situation is far more difficult than has been reported. The Seoul Gyopo Guide has described the Bank of Korea's difficult position here, three weeks ago. This difficult balancing act is one that the Bank of Korea will need to perform for the immediate future.
Demand Pull Inflation? Not So Fast.
Some economists would suggest that Korea has faced something called "demand-pull inflation," which is that everyday Koreans are trying to buy more items, such as food, clothing, entertainment, and durable goods like appliances. Really? Anecdotal evidence doesn't suggest that. While department store sales have increased, the fact is that there isn't a shortage of items for sale in the stores. In fact, popular imported items have increased in price due to the relative weakness of the Korean Won compared to its counterparts, such as the Euro. That said, it is undoubtedly true that credit card companies have loosened their standards of lending considerably, which has added liquidity to the domestic Korean economy.
Much of the reason that everyday Koreans may be more confident is because they know that Korean companies are prospering in the international marketplace. It is the case that the weak Won relative to other currencies, especially the Japanese Yen, has contributed greatly to this. The Seoul Gyopo Guide has written about this a number of times. A reversal of this will make Korean products less competitive from a price perspective, which would, in turn, cause lower Korean corporate profits. Korean consumer confidence would fall, and the current optimism would fade. A sharply higher interest rate would make the Won rise.
The Real Estate Problem
The elephant in the room is the fact that the Korean real estate market is in trouble. In Gangnam, the district of Seoul of the most expensive apartments in Seoul, the price of only the most expensive apartments is stable. Apartments in the USD 1,000,000-3,000,000 range have dropped during the past two years. Lower real estate prices are especially damaging to Koreans, because Koreans have a larger percentage of their entire net worth invested in their homes. The number one factor in real estate prices? Interest rates. A rate increase by the BOK would only serve to worsen the situation. In the United States, the US Federal Reserve has fought very, very hard, to keep interest rates lower to slow the rate of price declines of real estate. It can be argued that this will not end well, but it shows just how important that the US Fed believes that the value of real estate is the US economy. In Korea, where the percentage of overall wealth spent on real estate ownership is higher than in the US, can the economic logic be much different? No.
The BOK Needs To Maintain Its Right to Be Unpredictable
If you knew for sure that the price (of anything) would be higher tomorrow, then the price would be higher today. You don't need an economics degree in order to understand this. Interest rates can be defined as the price of money. So, if the Bank of Korea was entirely predictable in the direction and timing of its interest rate moves, than that, in itself, would be self-defeating. The BOK needs to have the element of surprise in its decisions. The reasons? First, it must maintain its ability to intentionally shock the markets. Gradual interest rate changes do not accomplish this. The reason for the need to shock the markets is that the BOK needs to be able to communicate to the domestic and international marketplace that there is an urgent need for interest rate changes. Second, the BOK needs to be able to move in large increments should conditions warrant. Why? The world remains unstable in the fallout of the financial crisis. The huge amount of governmental stimulus has created imbalances around the world. That has made different locations (Greece, Ireland, Middle East) subject to wild changes in fortune. Due its small size, small population, and very dense concentration in profits among a very few industries, the BOK must maintain all its options to the fullest extent possible. The element of surprise is one of those options.
Opinions
One of the reasons for creating the Seoul Gyopo Guide was to educate those unfamiliar with the Korean economy about Korea. Along with that, native Koreans themselves must understand how Korea fits within the global market, where capital moves rapidly. In some ways, Korea is very prepared for that. Its end products are world-class in many industries. However, in other ways, Korea has not found the proper balance between openness to capital flows and its pursuit of economic independence. Complete economic independence is not possible unless Korea annexes larger, more heavily populated countries, which are rich in natural resources, in a peaceful manner. In other words, it is virtually impossible. The Bank of Korea is reacting properly to this by maintaining its maximum flexibility. Criticisms of being a "tool of the administration" may be, in part, true. However, given Korea's small size and inherent vulnerability, the BOK can accept that misguided criticism in favor of its pursuit of a combination of economic growth and price stability. Displacements in the Korean economy have a much larger effect than those that occur in larger countries like the US, or regions like the EU. As a result, applying the same type of logic that works in those areas don't necessarily work for Korea. Nevertheless, every decision that the Bank of Korea is, by its nature, controversial, and there will be Monday morning quarterbacks giving their opinion after each decision. Undoubtedly, the Bank of Korea is ready to accept that consequence.
The other day, the Bank of Korea (BOK) kept its target interest stable, which was different from market expectations. Market participants widely believed that another rate increase would occur. In the Wall Street Journal's Korea Blog, it was reported that the Bank of Korea has received a great deal of criticism about this most recent decision. The Seoul Gyopo Guide believes that over time, interest rates must increase in Korea. However, the criticism for the most recent, one-time decision, is unfounded because the situation is far more difficult than has been reported. The Seoul Gyopo Guide has described the Bank of Korea's difficult position here, three weeks ago. This difficult balancing act is one that the Bank of Korea will need to perform for the immediate future.
Demand Pull Inflation? Not So Fast.
Some economists would suggest that Korea has faced something called "demand-pull inflation," which is that everyday Koreans are trying to buy more items, such as food, clothing, entertainment, and durable goods like appliances. Really? Anecdotal evidence doesn't suggest that. While department store sales have increased, the fact is that there isn't a shortage of items for sale in the stores. In fact, popular imported items have increased in price due to the relative weakness of the Korean Won compared to its counterparts, such as the Euro. That said, it is undoubtedly true that credit card companies have loosened their standards of lending considerably, which has added liquidity to the domestic Korean economy.
Much of the reason that everyday Koreans may be more confident is because they know that Korean companies are prospering in the international marketplace. It is the case that the weak Won relative to other currencies, especially the Japanese Yen, has contributed greatly to this. The Seoul Gyopo Guide has written about this a number of times. A reversal of this will make Korean products less competitive from a price perspective, which would, in turn, cause lower Korean corporate profits. Korean consumer confidence would fall, and the current optimism would fade. A sharply higher interest rate would make the Won rise.
The Real Estate Problem
The elephant in the room is the fact that the Korean real estate market is in trouble. In Gangnam, the district of Seoul of the most expensive apartments in Seoul, the price of only the most expensive apartments is stable. Apartments in the USD 1,000,000-3,000,000 range have dropped during the past two years. Lower real estate prices are especially damaging to Koreans, because Koreans have a larger percentage of their entire net worth invested in their homes. The number one factor in real estate prices? Interest rates. A rate increase by the BOK would only serve to worsen the situation. In the United States, the US Federal Reserve has fought very, very hard, to keep interest rates lower to slow the rate of price declines of real estate. It can be argued that this will not end well, but it shows just how important that the US Fed believes that the value of real estate is the US economy. In Korea, where the percentage of overall wealth spent on real estate ownership is higher than in the US, can the economic logic be much different? No.
The BOK Needs To Maintain Its Right to Be Unpredictable
If you knew for sure that the price (of anything) would be higher tomorrow, then the price would be higher today. You don't need an economics degree in order to understand this. Interest rates can be defined as the price of money. So, if the Bank of Korea was entirely predictable in the direction and timing of its interest rate moves, than that, in itself, would be self-defeating. The BOK needs to have the element of surprise in its decisions. The reasons? First, it must maintain its ability to intentionally shock the markets. Gradual interest rate changes do not accomplish this. The reason for the need to shock the markets is that the BOK needs to be able to communicate to the domestic and international marketplace that there is an urgent need for interest rate changes. Second, the BOK needs to be able to move in large increments should conditions warrant. Why? The world remains unstable in the fallout of the financial crisis. The huge amount of governmental stimulus has created imbalances around the world. That has made different locations (Greece, Ireland, Middle East) subject to wild changes in fortune. Due its small size, small population, and very dense concentration in profits among a very few industries, the BOK must maintain all its options to the fullest extent possible. The element of surprise is one of those options.
Opinions
One of the reasons for creating the Seoul Gyopo Guide was to educate those unfamiliar with the Korean economy about Korea. Along with that, native Koreans themselves must understand how Korea fits within the global market, where capital moves rapidly. In some ways, Korea is very prepared for that. Its end products are world-class in many industries. However, in other ways, Korea has not found the proper balance between openness to capital flows and its pursuit of economic independence. Complete economic independence is not possible unless Korea annexes larger, more heavily populated countries, which are rich in natural resources, in a peaceful manner. In other words, it is virtually impossible. The Bank of Korea is reacting properly to this by maintaining its maximum flexibility. Criticisms of being a "tool of the administration" may be, in part, true. However, given Korea's small size and inherent vulnerability, the BOK can accept that misguided criticism in favor of its pursuit of a combination of economic growth and price stability. Displacements in the Korean economy have a much larger effect than those that occur in larger countries like the US, or regions like the EU. As a result, applying the same type of logic that works in those areas don't necessarily work for Korea. Nevertheless, every decision that the Bank of Korea is, by its nature, controversial, and there will be Monday morning quarterbacks giving their opinion after each decision. Undoubtedly, the Bank of Korea is ready to accept that consequence.
Sunday, February 6, 2011
North Korean-Chinese Agreement on Raw Materials is a Troubling Development (update 1)
Bloomberg Reported on North Korean-Chinese Rare Earths Deal
Readers of the Seoul Gyopo Guide knew this prior to Bloomberg's report, which was published on February 8th. Below, the Seoul Gyopo Guide's February 6th report and a quick analysis of the ramifications to the South Korean economy, and its potential effect on North-South Korean relations, is posted below.
It's No Secret: China's Economy's Growth Has Benefited South Korea
It is a well-known fact that the economic development of China has been very rapid, as it has grown at basically 8-10% per year for almost the past 30 years. The impact on the global economy has been enormous. The largest Korean companies, Samsung Electronics, Hyunda-Kia Motor Corporation, LG Electronics, Hyundai Heavy, SK Energy, POSCO, to name a few, have benefited \during this time. The revenues earned \by the largest Korean companies have funded research and development efforts which have yielded global market share gains versus its global competitors, including the Japanese. Globally, Korean companies are at least on par with their global competitors as measured by almost any measure. The Seoul Gyopo Guide has pointed out that the relatively weak Korean Won has also played a very strong role in this.
China's Growth Has Kept Down Global Inflation. For Now.
The reason that "inflation" on a global level has been subdued over the past 20 years has been largely due to the fact that China has absorbed much of the price pressures that would have otherwise occurred. As demand has increased in other parts of the world, China supplied cheap items at an almost-endless rate, it would seem. China has been able to do this because it is trying to transition 1.3 billion people out of its rural living into cities and a modernized economy. Doing this has been no small feat.
However, the slow-moving train of global inflation seems to be picking up steam around the world. Korea has also experienced this. As those same 1.3 billion people have gradually become wealthier, they have become consumers on their own as well. As the Chinese economic evolution continues, China will demand raw materials in order to continue it development.
The problem: the supply of raw materials is in question and the demand continues unabated. The result: inflation for raw materials of almost every type. China, once the great dampening force on global inflation, is becoming the great source of global inflation.
China's Delicate High-Wire Act
As a centrally planned economy, China has looked into the future, which means that its time horizon is more than 5 clicks on the internet. Its demand for raw materials, and energy resources, has been undeterred by almost any economic shock over the past 2 decades. Many in the financial markets would suggest that China has hoarded certain raw materials. It is understandable to see why. Take copper, for instance. Copper is the one metal which is absolutely essential for construction. Over the past 20 years, the price of copper has tripled, even with global output increasing by over 50% during that same time.
At a time that China is trying to grow its economy, it must also try to quell inflation. Inflation has historically been the reason that governments are thrown into turmoil. Many countries today are facing this as food shortages coupled with inflation have made the general populations...uneasy, to put it mildly. The Chinese Central Bank is playing a very delicate balancing act indeed.
Out of Singapore, this article appeared, and it can, almost all by itself, explain why China won't allow a war between Koreas, and why this can fundamentally change the nature of the North-South Korea relationship.
If True, North Korea's Raw Materials Reserves Are Enormous
According to the CIA, North Korea's GDP in 2009 was about $40 Billion. According to the AsiaNews site above,
Most recently, China has threatened to cease the export of minerals called 'rare earth' metals. The reason for this is that those rare earth metals, although used in very small quantities, are critical for technology manufacturing. It is yet another reason that the $6.3Trillion estimate may be too low, i.e. it will not take into account the potential for much higher prices of rare earth metals.
If True, North Korea's Raw Materials Reserves Are a Game Changer
Development of raw materials extraction could not come soon enough for the North Korean economy. How this develops will be interesting, and potentially can strongly affect the North-South Korean dialogue, as well as how Korea fits in the greater regional geopolitical structure.
Readers of the Seoul Gyopo Guide know that the writer believes that war on the Korean peninsula is unlikely at best. The bottom line is that there are too many parties who have too much to lose if there is a widespread war on the Korean peninsula, and the Korean people are unlikely to wage war with one another (self-defense is another, more complicated matter, and that is why President Lee has taken harsh, well-deserved criticism, for his administration's handling of recent events). Development of raw materials is critical to China, which further supports the Seoul Gyopo Guide's claims. There are other issues to consider. First, the Chinese are likely to strike exceptionally favorable terms from North Korea, given North Korea's economic woes. It is not hard to imagine that any agreement is tied to further economic assistance from China to North Korea. Second, the question will remain on where those revenues will go. If the revenues are diverted for military development, then this would be a source of funds that could be very dangerous to the North-South Korean standoff. Third, South Korea itself could be greatly disadvantaged compared to Chinese competitors. Already, China poses a threat to certain important Korean industries. A steady supply of raw materials at below-market prices would be a great advantage for China-based corporations. Any one of the three issues may prove to be a flashpoint: the combination of all three is particularly intriguing.
Conclusions
South Korea, too frequently, is a mere spectator to large, transformational changes in the global economy. Most of this is not due to anything that the South Korean government has done. South Korea remains small geographically, without many raw materials resources of its own, and with a relatively small population. These limitations make South Korea's rapid economic development even more amazing in many ways, especially in light of the fact that there has been continual, competent competition from foreign-based companies (ever hear of Toyota or Sony?). Until now, South Korean economic and monetary policy have provided a shield for South Korean industries which has allowed these industries to become global leaders. However, it is a story yet uncompleted because Korea is not China, and the fact that such a large economy has levers that can be used to disadvantage South Korea is troubling. This will not happen overnight, and how raw materials are developed in North Korea is still yet to be determined. Nevertheless, the potential effects of North Korean-Chinese cooperation on the development of sorely-needed raw materials could be enormous.
Clearly, this post needs to be expanded greatly, and will be expanded in upcoming updates.
Please "Like" this post and/or follow me on Twitter.
Readers of the Seoul Gyopo Guide knew this prior to Bloomberg's report, which was published on February 8th. Below, the Seoul Gyopo Guide's February 6th report and a quick analysis of the ramifications to the South Korean economy, and its potential effect on North-South Korean relations, is posted below.
It's No Secret: China's Economy's Growth Has Benefited South Korea
It is a well-known fact that the economic development of China has been very rapid, as it has grown at basically 8-10% per year for almost the past 30 years. The impact on the global economy has been enormous. The largest Korean companies, Samsung Electronics, Hyunda-Kia Motor Corporation, LG Electronics, Hyundai Heavy, SK Energy, POSCO, to name a few, have benefited \during this time. The revenues earned \by the largest Korean companies have funded research and development efforts which have yielded global market share gains versus its global competitors, including the Japanese. Globally, Korean companies are at least on par with their global competitors as measured by almost any measure. The Seoul Gyopo Guide has pointed out that the relatively weak Korean Won has also played a very strong role in this.
China's Growth Has Kept Down Global Inflation. For Now.
The reason that "inflation" on a global level has been subdued over the past 20 years has been largely due to the fact that China has absorbed much of the price pressures that would have otherwise occurred. As demand has increased in other parts of the world, China supplied cheap items at an almost-endless rate, it would seem. China has been able to do this because it is trying to transition 1.3 billion people out of its rural living into cities and a modernized economy. Doing this has been no small feat.
However, the slow-moving train of global inflation seems to be picking up steam around the world. Korea has also experienced this. As those same 1.3 billion people have gradually become wealthier, they have become consumers on their own as well. As the Chinese economic evolution continues, China will demand raw materials in order to continue it development.
The problem: the supply of raw materials is in question and the demand continues unabated. The result: inflation for raw materials of almost every type. China, once the great dampening force on global inflation, is becoming the great source of global inflation.
China's Delicate High-Wire Act
As a centrally planned economy, China has looked into the future, which means that its time horizon is more than 5 clicks on the internet. Its demand for raw materials, and energy resources, has been undeterred by almost any economic shock over the past 2 decades. Many in the financial markets would suggest that China has hoarded certain raw materials. It is understandable to see why. Take copper, for instance. Copper is the one metal which is absolutely essential for construction. Over the past 20 years, the price of copper has tripled, even with global output increasing by over 50% during that same time.
At a time that China is trying to grow its economy, it must also try to quell inflation. Inflation has historically been the reason that governments are thrown into turmoil. Many countries today are facing this as food shortages coupled with inflation have made the general populations...uneasy, to put it mildly. The Chinese Central Bank is playing a very delicate balancing act indeed.
Out of Singapore, this article appeared, and it can, almost all by itself, explain why China won't allow a war between Koreas, and why this can fundamentally change the nature of the North-South Korea relationship.
If True, North Korea's Raw Materials Reserves Are Enormous
According to the CIA, North Korea's GDP in 2009 was about $40 Billion. According to the AsiaNews site above,
South Korea estimates the total value of mineral deposits in North Korea at 6.3 trillion dollars.
"The agreement contains a specific list of mines to be developed...including gold, anthracite coal and rare earth mineral mines," Yonhap quoted a source familiar with North Korean affairs as saying.Well, how much is $6.3 trillion dollars? Let's say there are 25 million people in North Korea. That is $252,000 per person. This is not to say that North Korean citizens will instantly become $252,000 wealthier (yes, I have received this type of email). It simply gives you an idea of how much money that is, and its effect on the relatively small North Korean economy. This is actually a HUGE understatement of the potential effect because of the associated infrastructure that will need to be built in order to extract those raw materials. This has occured in the past, as reported in the Washington Post in 2008.
Most recently, China has threatened to cease the export of minerals called 'rare earth' metals. The reason for this is that those rare earth metals, although used in very small quantities, are critical for technology manufacturing. It is yet another reason that the $6.3Trillion estimate may be too low, i.e. it will not take into account the potential for much higher prices of rare earth metals.
If True, North Korea's Raw Materials Reserves Are a Game Changer
Development of raw materials extraction could not come soon enough for the North Korean economy. How this develops will be interesting, and potentially can strongly affect the North-South Korean dialogue, as well as how Korea fits in the greater regional geopolitical structure.
Readers of the Seoul Gyopo Guide know that the writer believes that war on the Korean peninsula is unlikely at best. The bottom line is that there are too many parties who have too much to lose if there is a widespread war on the Korean peninsula, and the Korean people are unlikely to wage war with one another (self-defense is another, more complicated matter, and that is why President Lee has taken harsh, well-deserved criticism, for his administration's handling of recent events). Development of raw materials is critical to China, which further supports the Seoul Gyopo Guide's claims. There are other issues to consider. First, the Chinese are likely to strike exceptionally favorable terms from North Korea, given North Korea's economic woes. It is not hard to imagine that any agreement is tied to further economic assistance from China to North Korea. Second, the question will remain on where those revenues will go. If the revenues are diverted for military development, then this would be a source of funds that could be very dangerous to the North-South Korean standoff. Third, South Korea itself could be greatly disadvantaged compared to Chinese competitors. Already, China poses a threat to certain important Korean industries. A steady supply of raw materials at below-market prices would be a great advantage for China-based corporations. Any one of the three issues may prove to be a flashpoint: the combination of all three is particularly intriguing.
Conclusions
South Korea, too frequently, is a mere spectator to large, transformational changes in the global economy. Most of this is not due to anything that the South Korean government has done. South Korea remains small geographically, without many raw materials resources of its own, and with a relatively small population. These limitations make South Korea's rapid economic development even more amazing in many ways, especially in light of the fact that there has been continual, competent competition from foreign-based companies (ever hear of Toyota or Sony?). Until now, South Korean economic and monetary policy have provided a shield for South Korean industries which has allowed these industries to become global leaders. However, it is a story yet uncompleted because Korea is not China, and the fact that such a large economy has levers that can be used to disadvantage South Korea is troubling. This will not happen overnight, and how raw materials are developed in North Korea is still yet to be determined. Nevertheless, the potential effects of North Korean-Chinese cooperation on the development of sorely-needed raw materials could be enormous.
Clearly, this post needs to be expanded greatly, and will be expanded in upcoming updates.
Please "Like" this post and/or follow me on Twitter.
Thursday, January 27, 2011
Japan Downgraded: Korea Needs to Avoid Deflation
You Know It's a Problem When...Japan Downgraded by Moody's
Today, Japan was downgraded from AA to AA- by Moody's, one of the two most important ratings agencies. These agencies are widely used by global investors when they consider whether or not a country's government will be able to repay its debts. We can debate, and there are those that would sharply criticize whether or not these ratings agencies are useful, given the fact that they have largely missed the financial crisis on a systematic basis. Nevertheless, it is still true that investors pay attention when large changes to ratings occur, especially to economies that are the size of Japan. While there is no imminent risk to Japan, this gesture does reflect many of the things that the Seoul Gyopo Guide has pointed out on numerous occasions. In fact, this post, which challenges why Koreans continue to learn the Japanese language, is one of the most-read posts on the Seoul Gyopo Guide.
The Japanese Quagmire: Deflation
Recently, this article was written about Japan (Bloomberg.com).
The Korean Problem is Different But an Easy Answer is Difficult to Find
Korea, as everyday Koreans know, faces inflation which is higher than the officially reported rate (people living in Korea are now all vigorously nodding their heads in agreement). You know that inflation is a problem when the English-written news sites report it. Well, that has now occurred. The problem actually is not inflation per se, but the real problem is that wages and nominal wealth (checkbook balances, stock market holdings, real estate values, etc) are not increasing at the same rate. This has been due to a large number of different problems. The result is that the average Korean feels poorer even though the employers (companies) continue to perform well.
The Seoul Gyopo Guide has suggested that greater amounts of equity must be owned by employees. Korean employees have been very reluctant in the past to receive compensation in the form of stock. The problem with this is that cash does not have the possibility of appreciating at the same rate as inflation.
Korea Needs to Avoid The Japanese Example
Some of the Japan's problems may have been unavoidable, but Korea needs to observe, and prevent some of the causes for the current situation in Japan. First, it is clear why US Federal Reserve Chairman Bernanke has been trying to avoid deflation: Japan has unable to escape deflation's clutches for two decades. Second, there is the longer-term issue of an aging population, who do not spend on the newest products and who do not treasure the newest innovations. This is a little-mentioned, but critical factor in understanding why Korea has prospered. Young Korean consumers demand the newest features, and thus, Korea serves as a "testing ground" of sorts for the global marketplace. While it is a blatant stereotype to suggest that Korean consumers are choosier than almost any other consumer group in the world, it may, in fact, be true. (If a product fails in Korea, then it is likely to fail abroad. In addition to the joint ventures that Korean companies have had with US-based entertainment companies such as Dreamworks SKG, many first-run films actually open in Korea for this reason.) Third, Korea must avoid huge national indebtedness. This point should be obvious, given that the IMF crisis was largely the result of the huge debt overhang in Korea.
Many aspects of life in Korea reflect Korea's reluctant jealousy of Japan. Korea's corporate structures and methods could (although not exclusively) resemble Japan's. Both countries are highly dependent on foreign energy resources. Korea may not, over time, be able to avoid some of the larger forces at work in Japan, such as an aging population. However, many of Japan's difficulties can be avoided so that Korea does not suffer from Japanese-style deflation.
Today, Japan was downgraded from AA to AA- by Moody's, one of the two most important ratings agencies. These agencies are widely used by global investors when they consider whether or not a country's government will be able to repay its debts. We can debate, and there are those that would sharply criticize whether or not these ratings agencies are useful, given the fact that they have largely missed the financial crisis on a systematic basis. Nevertheless, it is still true that investors pay attention when large changes to ratings occur, especially to economies that are the size of Japan. While there is no imminent risk to Japan, this gesture does reflect many of the things that the Seoul Gyopo Guide has pointed out on numerous occasions. In fact, this post, which challenges why Koreans continue to learn the Japanese language, is one of the most-read posts on the Seoul Gyopo Guide.
The Japanese Quagmire: Deflation
Recently, this article was written about Japan (Bloomberg.com).
Their (Japanese companies) advantage may be Japan’s disadvantage. Prices in Japan as measured by the gross domestic product deflator have declined almost without interruption since 1994. That has muted the effect of falling wages and provides a cautionary tale for Federal Reserve Chairman Ben S. Bernanke, who has been lecturing on deflation’s perils as a central banker since 2002.
“It’s (deflation) extremely corrosive,” said Richard Jerram, Singapore-based head of Asian economics at Macquarie Securities Ltd. “The problem is, it’s not a spectacular problem in any given month or quarter.”
What does any of that mean? It means that deflation, over long periods of time, can result in the inability of those with lots of debt (like Japan) to either default, or to depreciate their currency (the Yen). Today's downgrade of Japan by Moody's reflects this problem. The downgrade's affect alone could very bad for Korea for a variety of reasons. First, there are many, many Japanese tourists visiting Korea (go to Myung-dong sometime, all you hear is Japanese and Chinese, it seems). If the JPY depreciates sharply, then the Japanese will not be able to afford to visit Korea. Second, a depreciation in the JPY will make Korean-made products more expensive on the international marketplace. Followers of the Seoul Gyopo Guide know that Korean corporations have feasted due to Korea's relatively cheap Won, when compared to the Japanese Yen.Deflation will steadily sap nominal growth, depriving the government of revenue, until one day Japan will no longer be able to finance its borrowing, Jerram said. The country will either default on a debt of about twice the size of the economy or debase its currency to reduce the real value of liabilities.
The Korean Problem is Different But an Easy Answer is Difficult to Find
Korea, as everyday Koreans know, faces inflation which is higher than the officially reported rate (people living in Korea are now all vigorously nodding their heads in agreement). You know that inflation is a problem when the English-written news sites report it. Well, that has now occurred. The problem actually is not inflation per se, but the real problem is that wages and nominal wealth (checkbook balances, stock market holdings, real estate values, etc) are not increasing at the same rate. This has been due to a large number of different problems. The result is that the average Korean feels poorer even though the employers (companies) continue to perform well.
The Seoul Gyopo Guide has suggested that greater amounts of equity must be owned by employees. Korean employees have been very reluctant in the past to receive compensation in the form of stock. The problem with this is that cash does not have the possibility of appreciating at the same rate as inflation.
Korea Needs to Avoid The Japanese Example
Some of the Japan's problems may have been unavoidable, but Korea needs to observe, and prevent some of the causes for the current situation in Japan. First, it is clear why US Federal Reserve Chairman Bernanke has been trying to avoid deflation: Japan has unable to escape deflation's clutches for two decades. Second, there is the longer-term issue of an aging population, who do not spend on the newest products and who do not treasure the newest innovations. This is a little-mentioned, but critical factor in understanding why Korea has prospered. Young Korean consumers demand the newest features, and thus, Korea serves as a "testing ground" of sorts for the global marketplace. While it is a blatant stereotype to suggest that Korean consumers are choosier than almost any other consumer group in the world, it may, in fact, be true. (If a product fails in Korea, then it is likely to fail abroad. In addition to the joint ventures that Korean companies have had with US-based entertainment companies such as Dreamworks SKG, many first-run films actually open in Korea for this reason.) Third, Korea must avoid huge national indebtedness. This point should be obvious, given that the IMF crisis was largely the result of the huge debt overhang in Korea.
Many aspects of life in Korea reflect Korea's reluctant jealousy of Japan. Korea's corporate structures and methods could (although not exclusively) resemble Japan's. Both countries are highly dependent on foreign energy resources. Korea may not, over time, be able to avoid some of the larger forces at work in Japan, such as an aging population. However, many of Japan's difficulties can be avoided so that Korea does not suffer from Japanese-style deflation.
Sunday, January 23, 2011
Korea's Tenuous FX/Interest Rate/Inflation Situation (Update 1)
Korea Declares A "War" on Inflation: Too Late, It's Here
This past week, President Lee Myung-bak declared a "war on inflation." Official statistics reflect what every day Koreans have already know: inflation is a problem at home. The Seoul Gyopo Guide has pointed out here, months ago, that the KOR-US Free Trade Agreement needed passing immediately in order to reduce the cost of any imports that come from any country. Later this year, a Korea-EU Free Trade Agreement should also be in place. These agreements are important, but they are not the dominant factors affecting everyday Korean life. This post describes some of the issues that face the Korean economy, and potential effects on the Korean population.
Korean Inflation Has Been Rising and Looks Like It Will Continue
After the fact, it has been reported that Korea's inflation rate has risen to 2 1/2-year highs. To working-class Koreans, this is not news. As a country that is highly dependent upon foreign sources of energy, the rise in the price of oil to nearly USD 90/barrel is an unwelcome development. In addition, the price of commodities such as metals and food have also risen dramatically. Given that Korea is a net importer of each of these, inflationary pressure is set to rise for the foreseeable future, as companies will attempt to increase prices of final goods.
Korean Interest Rates Are Going Up
This past week, the Bank of Korea increased interest rates, to the surprise of many. The reason that interest rates are used to curb inflation is because higher interest rates will create additional demand for the Korean Won relative to other currencies. In addition, people may choose to save instead of spend which will gradually reduce demand.
Rises in Interest Rates Could Hurt Korean Competitiveness
The other side of this balance is that stronger demand for the Korean Won relative to other currencies will make Korean-made exports less profitable for Korean corporations, or reduce demand for Korean-made products. Since the beginning of the financial crisis beginning in 2007, Korea has benefited a great deal from the relative cheapness of the Korean Won. This point has been made by the Seoul Gyopo Guide a number of times. In fact, one reason that Japan's economy continues to lag is because competitive Korean-made products are cheaper than their Japanese competitors' products. Conversely, if the Korean Won strengthens compared to other foreign currencies, particularly versus the USD, EUR and JPY, Korean products may suffer on the international marketplace. This would be a major source of concern for all Koreans.
(Update 1)In the English version of Dong-A Ilbo, this article was written to reflect the same opinions already posted here on the Seoul Gyopo Guide. The downgrade of Japan's debt rating by Moody's may have contributed to a slight depreciation in the Japanese Yen against the U.S. dollar last week. Whether or not this is coupled with Korean Won strength or weakness is yet to be seen.
Rises in Interest Rates Will Hurt Domestic Real Estate
In addition to the challenge that a rising Korean Won would create on the international marketplace, the domestic Korean real estate market will continue to struggle. The single biggest factor in the value of real estate is the level of interest rates. Higher interest rates make it more expensive to borrow to buy an apartment, even in Gangnam-gu. If the Bank of Korea continues to raise interest rates, then the value of domestic real estate cannot rise dramatically. There are other factors influencing the price of Korean real estate. For example, the aging population will reduce demand, over time, for apartments in the busiest parts of Seoul. That will translate to lower prices over time.
In addition, greater transparency and greater belief in the laws governing Korean corporations will reduce the percentage of household wealth used for real estate. Why is that? It is because there are other assets, such as stocks and bonds, which may be more promising. Those investments have been hampered by the fact that Koreans themselves are very wary of the largest chaebol, the government, and the legal structure that keeps corporate misuse of funds in check. As the Korean economy and regulations mature, native Koreans may re-allocate their wealth from real estate to other areas.
The problem with lower real estate prices is that people will feel less secure, and may be unwilling to spend. This has happened in the United States, where the plunge in real estate prices has depressed consumer spending. It is not a heroic prediction to suggest that if Korean real estate prices decline, then Koreans that own their apartments are going to spend less money for food, movies, entertainment, and mobile phones. (Well, maybe not for mobile phones, but you get the idea.)
The other problem with lower real estate prices is that there are lower amounts of real estate taxes that will be collected by the government. Why is this bad? It is bad because then the government would have less money to spend, if further economic stimulus is needed. Korea has spent a great deal of money during the financial crisis by bringing forward infrastructure projects, as well as compensating construction companies who built large apartment complexes outside of central Seoul, and that remain unoccupied, even today.
A Few Potential Solutions
The Seoul Gyopo Guide has pointed out that the government and companies and society face difficult choices. That is what is called a conundrum. There are no easy solutions. However, here are a few, some of which have been proposed in earlier posts.
First, Korean companies need to hedge their exposure to the possible appreciation of the Korean Won. This point has been made by the Seoul Gyopo Guide months ago. If the Korean Won rises, and Korean products are less competitive, then the only way that Korean companies' profitability will be sustained is if there are measures to counteract a stronger Korean Won. That is fundamentally different from recommending that Korean corporations should speculate on the KRW/JPY rate. If there is a decline in global demand, or an appreciation of the KRW relative to other currencies, then Korean corporate performance will suffer, almost regardless of the quality of Korean-made products. In short, the relative strength of the KRW is to Korean corporations can be compared to jet fuel prices to airlines. The best-run airlines partially hedge their exposure, and so should Korean corporations. Korean corporations need to do this without taking excessive risks; the knock-in, knock-out (KIKO) options debacle was a situation where Korean corporations misused derivatives (with the help of securities dealers) can be avoided by using simpler, more straight-forward strategies.
Second, Korean companies' investments in technology to create the most sophisticated, leading-edge products must be accelerated. Korean companies have made huge market gains, even since the beginning of the financial crisis. The hard-won profits and market share must be deployed to make sure that Korean-made products are the best from both a quality and features standpoint. The Seoul Gyopo Guide has pointed out that China has overtaken Korea in shipbuilding during 2010. Korea must reclaim its lead by offering superior products, and Hyundai Heavy, Samsung Heavy, et al seem to have responded. Samsung Electronics, Hyundai-Kia Motors, and other leaders must do the same.
Third, the Korean economy must support small and medium-sized enterprises. There needs to be a better way for the highly-educated Korean population to create wealth other than via speculation or working for a large chaebol. This includes, but is not limited to, tax incentives for new businesses. Small businesses employ the largest number of Americans, and while that is an unrealistic goal for Korea, there is little doubt about the fact that Korea has a well-educated, creative population which can create new ideas/products, and thus, companies.
Admittedly, this is only a partial list of suggestions. There will need to be changes in every aspect of Korean life, and perhaps even the way of thinking, in order for these suggestions to be taken seriously. However, the benefit would be that Korea would become more independent in determining its own economic course. That has limits, certainly, because of Korea's lack of natural resources, small population, and small geographic size. Nevertheless, moving forward in this way will reduce the burden on the government which has to tread carefully. Currently, if there were policy errors of any sort, then the consequences would be devastating. The time to address these issues is now, while Korea's economy is in relatively good shape compared to its global counterparts, not when there is an emergency situation.
Please "Like" this post and/or follow TheLostSeoul on Twitter
This past week, President Lee Myung-bak declared a "war on inflation." Official statistics reflect what every day Koreans have already know: inflation is a problem at home. The Seoul Gyopo Guide has pointed out here, months ago, that the KOR-US Free Trade Agreement needed passing immediately in order to reduce the cost of any imports that come from any country. Later this year, a Korea-EU Free Trade Agreement should also be in place. These agreements are important, but they are not the dominant factors affecting everyday Korean life. This post describes some of the issues that face the Korean economy, and potential effects on the Korean population.
Korean Inflation Has Been Rising and Looks Like It Will Continue
After the fact, it has been reported that Korea's inflation rate has risen to 2 1/2-year highs. To working-class Koreans, this is not news. As a country that is highly dependent upon foreign sources of energy, the rise in the price of oil to nearly USD 90/barrel is an unwelcome development. In addition, the price of commodities such as metals and food have also risen dramatically. Given that Korea is a net importer of each of these, inflationary pressure is set to rise for the foreseeable future, as companies will attempt to increase prices of final goods.
Korean Interest Rates Are Going Up
This past week, the Bank of Korea increased interest rates, to the surprise of many. The reason that interest rates are used to curb inflation is because higher interest rates will create additional demand for the Korean Won relative to other currencies. In addition, people may choose to save instead of spend which will gradually reduce demand.
Rises in Interest Rates Could Hurt Korean Competitiveness
The other side of this balance is that stronger demand for the Korean Won relative to other currencies will make Korean-made exports less profitable for Korean corporations, or reduce demand for Korean-made products. Since the beginning of the financial crisis beginning in 2007, Korea has benefited a great deal from the relative cheapness of the Korean Won. This point has been made by the Seoul Gyopo Guide a number of times. In fact, one reason that Japan's economy continues to lag is because competitive Korean-made products are cheaper than their Japanese competitors' products. Conversely, if the Korean Won strengthens compared to other foreign currencies, particularly versus the USD, EUR and JPY, Korean products may suffer on the international marketplace. This would be a major source of concern for all Koreans.
(Update 1)In the English version of Dong-A Ilbo, this article was written to reflect the same opinions already posted here on the Seoul Gyopo Guide. The downgrade of Japan's debt rating by Moody's may have contributed to a slight depreciation in the Japanese Yen against the U.S. dollar last week. Whether or not this is coupled with Korean Won strength or weakness is yet to be seen.
Rises in Interest Rates Will Hurt Domestic Real Estate
In addition to the challenge that a rising Korean Won would create on the international marketplace, the domestic Korean real estate market will continue to struggle. The single biggest factor in the value of real estate is the level of interest rates. Higher interest rates make it more expensive to borrow to buy an apartment, even in Gangnam-gu. If the Bank of Korea continues to raise interest rates, then the value of domestic real estate cannot rise dramatically. There are other factors influencing the price of Korean real estate. For example, the aging population will reduce demand, over time, for apartments in the busiest parts of Seoul. That will translate to lower prices over time.
In addition, greater transparency and greater belief in the laws governing Korean corporations will reduce the percentage of household wealth used for real estate. Why is that? It is because there are other assets, such as stocks and bonds, which may be more promising. Those investments have been hampered by the fact that Koreans themselves are very wary of the largest chaebol, the government, and the legal structure that keeps corporate misuse of funds in check. As the Korean economy and regulations mature, native Koreans may re-allocate their wealth from real estate to other areas.
The problem with lower real estate prices is that people will feel less secure, and may be unwilling to spend. This has happened in the United States, where the plunge in real estate prices has depressed consumer spending. It is not a heroic prediction to suggest that if Korean real estate prices decline, then Koreans that own their apartments are going to spend less money for food, movies, entertainment, and mobile phones. (Well, maybe not for mobile phones, but you get the idea.)
The other problem with lower real estate prices is that there are lower amounts of real estate taxes that will be collected by the government. Why is this bad? It is bad because then the government would have less money to spend, if further economic stimulus is needed. Korea has spent a great deal of money during the financial crisis by bringing forward infrastructure projects, as well as compensating construction companies who built large apartment complexes outside of central Seoul, and that remain unoccupied, even today.
A Few Potential Solutions
The Seoul Gyopo Guide has pointed out that the government and companies and society face difficult choices. That is what is called a conundrum. There are no easy solutions. However, here are a few, some of which have been proposed in earlier posts.
First, Korean companies need to hedge their exposure to the possible appreciation of the Korean Won. This point has been made by the Seoul Gyopo Guide months ago. If the Korean Won rises, and Korean products are less competitive, then the only way that Korean companies' profitability will be sustained is if there are measures to counteract a stronger Korean Won. That is fundamentally different from recommending that Korean corporations should speculate on the KRW/JPY rate. If there is a decline in global demand, or an appreciation of the KRW relative to other currencies, then Korean corporate performance will suffer, almost regardless of the quality of Korean-made products. In short, the relative strength of the KRW is to Korean corporations can be compared to jet fuel prices to airlines. The best-run airlines partially hedge their exposure, and so should Korean corporations. Korean corporations need to do this without taking excessive risks; the knock-in, knock-out (KIKO) options debacle was a situation where Korean corporations misused derivatives (with the help of securities dealers) can be avoided by using simpler, more straight-forward strategies.
Second, Korean companies' investments in technology to create the most sophisticated, leading-edge products must be accelerated. Korean companies have made huge market gains, even since the beginning of the financial crisis. The hard-won profits and market share must be deployed to make sure that Korean-made products are the best from both a quality and features standpoint. The Seoul Gyopo Guide has pointed out that China has overtaken Korea in shipbuilding during 2010. Korea must reclaim its lead by offering superior products, and Hyundai Heavy, Samsung Heavy, et al seem to have responded. Samsung Electronics, Hyundai-Kia Motors, and other leaders must do the same.
Third, the Korean economy must support small and medium-sized enterprises. There needs to be a better way for the highly-educated Korean population to create wealth other than via speculation or working for a large chaebol. This includes, but is not limited to, tax incentives for new businesses. Small businesses employ the largest number of Americans, and while that is an unrealistic goal for Korea, there is little doubt about the fact that Korea has a well-educated, creative population which can create new ideas/products, and thus, companies.
Admittedly, this is only a partial list of suggestions. There will need to be changes in every aspect of Korean life, and perhaps even the way of thinking, in order for these suggestions to be taken seriously. However, the benefit would be that Korea would become more independent in determining its own economic course. That has limits, certainly, because of Korea's lack of natural resources, small population, and small geographic size. Nevertheless, moving forward in this way will reduce the burden on the government which has to tread carefully. Currently, if there were policy errors of any sort, then the consequences would be devastating. The time to address these issues is now, while Korea's economy is in relatively good shape compared to its global counterparts, not when there is an emergency situation.
Please "Like" this post and/or follow TheLostSeoul on Twitter
Tuesday, November 2, 2010
Aye, There's the Rub: Korean Inflation Hits 20 Month High While the US, Europe, and Japan Fight Deflation
One week ago, Korea reported 3rd Quarter GDP which exhibited a slowdown on a quarter-over-quarter basis. On that basis, the Bank of Korea has resisted calls and predictions of raising domestic interest rates. The result has been a Korean Won which has been weaker than would have otherwise been expected. The Lost Seoul has reported that the weak Korean Won, particularly when compared to the Japanese Yen, has greatly helped the performance of the largest Korean corporations.
As posted here, The Lost Seoul has suggested that while the KOSPI has risen to three-year highs, and unemployment is the lowest of all OECD nations, the average Korean isn't happy, largely because of rising inflation, particularly of food prices. Weather has been particularly unkind to Korean farmers this year: even cabbage which is used to make the most famous Korean food, kimchi, has been in short supply. Today, that anecdotal evidence was confirmed: Bloomberg reported that Korean inflation is the highest it has been in 20 months. This makes the Bank of Korea's job more difficult. As was posted previously, The Lost Seoul described how the "wealth" effect, was not being shared among average Koreans. Inflation, in all forms, usually increases prices of all goods, relatively speaking. That is not the case in Korea, however, and thus, the average Korean does not feel wealthier, which leads to less consumption.
First, wage inflation is kept low by the ongoing underemployment (described here), particularly among young people in their early 20s. Second, the real estate market has remained subdued, at best. Third, employee participation in Employee Stock Ownership Plans (ESOPs) is low. Why does this matter? It matters because the largest Korean companies are the largest, by far, employers. As the KOSPI has risen to 3-year highs, the wealth effect due to increases in equity prices are not being shared by the employees. As a result, the employees' purchasing power has risen to meet inflation. Perhaps you could suggest that this is the case in the United States as well, except there exist far more developed pension plans, which are some of the most important equity owners of US equities. As a result, employees at US corporations can actually see financial statements in which the value of their equity holdings will increase as the stock market rises. The same cannot be said about Korea, so the "wealth" effect is small, and almost non-existent.
For the Bank of Korea, the spectre of stagflation has now appeared. Stagnant economic growth coupled with inflation equals stagflation. The global imbalances, if they persist, continue to make the outlook for the Korean economy shaky in the short-term, despite hard-fought gains made in quality and global competitiveness. The Bank of Korea may have its most delicate balancing act in the months ahead. No wonder it has not made violent moves in either direction, which would only increase the instability. Small countries like Korea must wait and see what the effects of these global imbalances on Korean corporations, and as an extension, the Korean economy.
The Lost Seoul
As posted here, The Lost Seoul has suggested that while the KOSPI has risen to three-year highs, and unemployment is the lowest of all OECD nations, the average Korean isn't happy, largely because of rising inflation, particularly of food prices. Weather has been particularly unkind to Korean farmers this year: even cabbage which is used to make the most famous Korean food, kimchi, has been in short supply. Today, that anecdotal evidence was confirmed: Bloomberg reported that Korean inflation is the highest it has been in 20 months. This makes the Bank of Korea's job more difficult. As was posted previously, The Lost Seoul described how the "wealth" effect, was not being shared among average Koreans. Inflation, in all forms, usually increases prices of all goods, relatively speaking. That is not the case in Korea, however, and thus, the average Korean does not feel wealthier, which leads to less consumption.
First, wage inflation is kept low by the ongoing underemployment (described here), particularly among young people in their early 20s. Second, the real estate market has remained subdued, at best. Third, employee participation in Employee Stock Ownership Plans (ESOPs) is low. Why does this matter? It matters because the largest Korean companies are the largest, by far, employers. As the KOSPI has risen to 3-year highs, the wealth effect due to increases in equity prices are not being shared by the employees. As a result, the employees' purchasing power has risen to meet inflation. Perhaps you could suggest that this is the case in the United States as well, except there exist far more developed pension plans, which are some of the most important equity owners of US equities. As a result, employees at US corporations can actually see financial statements in which the value of their equity holdings will increase as the stock market rises. The same cannot be said about Korea, so the "wealth" effect is small, and almost non-existent.
For the Bank of Korea, the spectre of stagflation has now appeared. Stagnant economic growth coupled with inflation equals stagflation. The global imbalances, if they persist, continue to make the outlook for the Korean economy shaky in the short-term, despite hard-fought gains made in quality and global competitiveness. The Bank of Korea may have its most delicate balancing act in the months ahead. No wonder it has not made violent moves in either direction, which would only increase the instability. Small countries like Korea must wait and see what the effects of these global imbalances on Korean corporations, and as an extension, the Korean economy.
The Lost Seoul
Saturday, October 30, 2010
Hyundai Motors and Kia Motors are Major Beneficiaries of the Strong Japanese Yen
Readers of the Seoul Gyopo Guide have known what has been coming out in the press at an increasingly rapid rate: the rise in the JPY is hurting the most important Japanese industries. Right on cue, the Japanese auto manufacturers are weighing in on the strong Yen:
Nissan: http://www.cnbc.com/id/39841041
Toyota: http://www.cnbc.com/id/39825815 and http://www.cnbc.com/id/39859591/
Suzuki: http://www.asianewsnet.net/home/news.php?id=15122&sec=2
Honda: http://www.asianewsnet.net/home/news.php?id=15183&sec=2
Of course, the world usually looks at the US dollar as the reference point. Again, the thesis here by The Lost Seoul has been consistent: Hyundai and Kia stand to gain as a result of the strong Yen. Exactly as predicted here on the original post, Kia reported record results just yesterday and Hyundai also followed suit.
Hyundai Motors, in particular, has been benefitting. The Kelley Blue Book has reported that Hyundai is the brand in which interest has increased the most. As many know, Hyundai's 100,000/10 year guarantee, as well as the Hyundai Assurance plan, which allows purchasers to give the car back to Hyundai should the driver lose his/her job, has made Hyundai famous.
And while Korea has stayed "under the radar" during the currency skirmish occuring now, the Korean automakers will continue to take market share in the international marketplace. Low interest rates are making things even worse, because now the Japanese have no flexibility to compete on price. Unless cars begin to fly out of showrooms, this will not change for the foreseeable future.
This story is nowhere near finished. There are no easy answers for the Japanese Yen, unless there is a coordinated effort by the largest nations to simultaneously sell the Yen. Perhaps this will occur naturally, but at this point, it does not seem very likely. While it may be suggested that this is a process that should happen naturally, the political reality is that Japan's internal political unease will most likely continue to force the BOJ to continue alone, until there is a coordinated effort, which will need to include the Chinese.
www.twitter.com/thelostseoul
Nissan: http://www.cnbc.com/id/39841041
Toyota: http://www.cnbc.com/id/39825815 and http://www.cnbc.com/id/39859591/
Suzuki: http://www.asianewsnet.net/home/news.php?id=15122&sec=2
Honda: http://www.asianewsnet.net/home/news.php?id=15183&sec=2
Of course, the world usually looks at the US dollar as the reference point. Again, the thesis here by The Lost Seoul has been consistent: Hyundai and Kia stand to gain as a result of the strong Yen. Exactly as predicted here on the original post, Kia reported record results just yesterday and Hyundai also followed suit.
Hyundai Motors, in particular, has been benefitting. The Kelley Blue Book has reported that Hyundai is the brand in which interest has increased the most. As many know, Hyundai's 100,000/10 year guarantee, as well as the Hyundai Assurance plan, which allows purchasers to give the car back to Hyundai should the driver lose his/her job, has made Hyundai famous.
And while Korea has stayed "under the radar" during the currency skirmish occuring now, the Korean automakers will continue to take market share in the international marketplace. Low interest rates are making things even worse, because now the Japanese have no flexibility to compete on price. Unless cars begin to fly out of showrooms, this will not change for the foreseeable future.
This story is nowhere near finished. There are no easy answers for the Japanese Yen, unless there is a coordinated effort by the largest nations to simultaneously sell the Yen. Perhaps this will occur naturally, but at this point, it does not seem very likely. While it may be suggested that this is a process that should happen naturally, the political reality is that Japan's internal political unease will most likely continue to force the BOJ to continue alone, until there is a coordinated effort, which will need to include the Chinese.
www.twitter.com/thelostseoul
Wednesday, October 27, 2010
Korea's 3rd Quarter GDP. Maybe the BOK and the Korean Government Are Right
This week, Korea's 3rd Quarter GDP figures were released, and they were decidedly...lukewarm at best, and according to the words of the Associated Press, economic activity has slowed markedly as the global economic recovery slows.
On the bright side, the year-over-year change was an increase of 4.5%, which is substantially higher than other OECD over this timeframe. Unemployment, although it increased last month, remains near the lowest levels of all OECD countries at 3.7%, up from 3.4% The KOSPI has risen to the highest level in three years.
On the other hand, problems persist. The quarter-over-quarter change was only 0.7%, as exports slowed. You can see from one of my previous posts, that Korea remains a vulnerable one-winged bird because one wing (exports) is keeping the bird flying, while the other wing (domestic demand) is not. The BOK and the Korean administration have continually tried to downplay the strength of the Korean economy, much like its Canadian counterpart. As Koreans know, the residential real estate market is stagnant, especially compared with its Asian (ex-Japan) counterparts. Some of that has to do with stricter bank regulations and tax laws which have intentiaonally restricted investment in real estate. Other negative factors include the slightly higher borrowing rate for mortgages, the strength in the Japanese Yen (see here), the aging population, and the large number of empty developments outside of Korea (신도시). This is particularly damaging to domestic demand because there is much higher percentage of family wealth invested in real estate than in most other countries. Therefore, the "wealth effect" that accompanies higher home prices is largely absent in Korea.
To the average Korean, the argument of "at least we are not Japan" is of little consolation as rising food prices have hit the average Korean particularly hard. The KOSPI's relentless rise this year has not made most Korean citizens happy because their share ownership is quite low compared to their net worth. In short, the benefits that would otherwise be enjoyed by citizens when the equity market rises is not being enjoyed by the average Korean, and that affects consumption. Naturally, that in turn affects GDP. When you couple that with the prospect of a slower global recovery than anticipated, the Korean government has been correct to reduce its fiscal stimulus only slowly, and the Bank of Korea has rightfully resisted calls for greater appreciation of the Korean Won. Both parties are serving the interests of the Korean people at this time. Now, that does not mean that will be no adverse consequences, but the current path seems to the less of two evils.
The Lost Seoul
http://www.seoulgyopoguide.com/
www.twitter.com/thelostseoul
On the bright side, the year-over-year change was an increase of 4.5%, which is substantially higher than other OECD over this timeframe. Unemployment, although it increased last month, remains near the lowest levels of all OECD countries at 3.7%, up from 3.4% The KOSPI has risen to the highest level in three years.
On the other hand, problems persist. The quarter-over-quarter change was only 0.7%, as exports slowed. You can see from one of my previous posts, that Korea remains a vulnerable one-winged bird because one wing (exports) is keeping the bird flying, while the other wing (domestic demand) is not. The BOK and the Korean administration have continually tried to downplay the strength of the Korean economy, much like its Canadian counterpart. As Koreans know, the residential real estate market is stagnant, especially compared with its Asian (ex-Japan) counterparts. Some of that has to do with stricter bank regulations and tax laws which have intentiaonally restricted investment in real estate. Other negative factors include the slightly higher borrowing rate for mortgages, the strength in the Japanese Yen (see here), the aging population, and the large number of empty developments outside of Korea (신도시). This is particularly damaging to domestic demand because there is much higher percentage of family wealth invested in real estate than in most other countries. Therefore, the "wealth effect" that accompanies higher home prices is largely absent in Korea.
To the average Korean, the argument of "at least we are not Japan" is of little consolation as rising food prices have hit the average Korean particularly hard. The KOSPI's relentless rise this year has not made most Korean citizens happy because their share ownership is quite low compared to their net worth. In short, the benefits that would otherwise be enjoyed by citizens when the equity market rises is not being enjoyed by the average Korean, and that affects consumption. Naturally, that in turn affects GDP. When you couple that with the prospect of a slower global recovery than anticipated, the Korean government has been correct to reduce its fiscal stimulus only slowly, and the Bank of Korea has rightfully resisted calls for greater appreciation of the Korean Won. Both parties are serving the interests of the Korean people at this time. Now, that does not mean that will be no adverse consequences, but the current path seems to the less of two evils.
The Lost Seoul
http://www.seoulgyopoguide.com/
www.twitter.com/thelostseoul
Tuesday, October 26, 2010
Relentless: Japanese Car Manufacturers are Complaining about the Strong Yen
Readers of the Seoul Gyopo Guide have known what has been coming out in the press at an increasingly rapid rate: the rise in the JPY is hurting the most important Japanese industries. Right on cue, the Japanese auto manufacturers are weighing in on the strong Yen:
Nissan: http://www.cnbc.com/id/39841041
Toyota: http://www.cnbc.com/id/39825815 and http://www.cnbc.com/id/39859591/
Suzuki: http://www.asianewsnet.net/home/news.php?id=15122&sec=2
Honda: http://www.asianewsnet.net/home/news.php?id=15183&sec=2
Of course, the world usually looks at the US dollar as the reference point. Again, the thesis here by The Lost Seoul has been consistent: Hyundai and Kia stand to gain as a result of the strong Yen. Exactly as predicted here on the original post, Kia reported record results just yesterday and Hyundai also followed suit.
Hyundai Motors, in particular, has been benefitting. The Kelley Blue Book has reported that Hyundai is the brand in which interest has increased the most. As many know, Hyundai's 100,000/10 year guarantee, as well as the Hyundai Assurance plan, which allows purchasers to give the car back to Hyundai should the driver lose his/her job, has made Hyundai famous.
And while Korea has stayed "under the radar" during the currency skirmish occuring now, the Korean automakers will continue to take market share in the international marketplace. Low interest rates are making things even worse, because now the Japanese have no flexibility to compete on price. Unless cars begin to fly out of showrooms, this will not change for the foreseeable future.
This story is nowhere near finished. There are no easy answers for the Japanese Yen, unless there is a coordinated effort by the largest nations to simultaneously sell the Yen. Perhaps this will occur naturally, but at this point, it does not seem very likely. While it may be suggested that this is a process that should happen naturally, the political reality is that Japan's internal political unease will most likely continue to force the BOJ to continue alone, until there is a coordinated effort, which will need to include the Chinese.
www.twitter.com/thelostseoul
Nissan: http://www.cnbc.com/id/39841041
Toyota: http://www.cnbc.com/id/39825815 and http://www.cnbc.com/id/39859591/
Suzuki: http://www.asianewsnet.net/home/news.php?id=15122&sec=2
Honda: http://www.asianewsnet.net/home/news.php?id=15183&sec=2
Of course, the world usually looks at the US dollar as the reference point. Again, the thesis here by The Lost Seoul has been consistent: Hyundai and Kia stand to gain as a result of the strong Yen. Exactly as predicted here on the original post, Kia reported record results just yesterday and Hyundai also followed suit.
Hyundai Motors, in particular, has been benefitting. The Kelley Blue Book has reported that Hyundai is the brand in which interest has increased the most. As many know, Hyundai's 100,000/10 year guarantee, as well as the Hyundai Assurance plan, which allows purchasers to give the car back to Hyundai should the driver lose his/her job, has made Hyundai famous.
And while Korea has stayed "under the radar" during the currency skirmish occuring now, the Korean automakers will continue to take market share in the international marketplace. Low interest rates are making things even worse, because now the Japanese have no flexibility to compete on price. Unless cars begin to fly out of showrooms, this will not change for the foreseeable future.
This story is nowhere near finished. There are no easy answers for the Japanese Yen, unless there is a coordinated effort by the largest nations to simultaneously sell the Yen. Perhaps this will occur naturally, but at this point, it does not seem very likely. While it may be suggested that this is a process that should happen naturally, the political reality is that Japan's internal political unease will most likely continue to force the BOJ to continue alone, until there is a coordinated effort, which will need to include the Chinese.
www.twitter.com/thelostseoul
Saturday, October 23, 2010
드디어 중앙일보에서 이 뉴스 나왔음. 오래전 우리 불록그에서 있었다.
Once again, The Seoul Gyopo Guide has reported news before one of the most important Korean newspapers and the International Herald Tribune.
http://joongangdaily.joins.com/article/view.asp?aid=2927280
This article entitled "Few ready for currency war" addressed the risks that a currency war would present to Korean companies. It is true: Korean companies, more than other countries, are vulnerable to volatility in foreign exhange levels.
There are many issues here.
First, foreign exchange movements can be partially hedged. What does this mean? That means that Korean companies can (and should) use financial instruments such as derivatives so that the companies do not suffer deep losses during times of foreign exchange volatility. In the past, Korean companies hoped for volatility because the products were not yet the best when compared to foreign (largely Japanese) competition. THIS IS NO LONGER THE CASE. In the US, the only brand more expensive than a Samsung TV is Sony. And the price differential is not large. In countries outside of the US, that is largely the case. The Seoul Gyopo Guide was created, in part, to recommend these types of strategies. One of the first posts addressed this issue: http://seoulgyopoguide.blogspot.com/2010/09/koreas-reason-for-feasting-this-year.html The problem has been the misuse and/or misunderstanding of derivatives. In the respect, the article is accurate: Korean companies need to increase their knowledge of derivatives if they can help stabilize the companies' operations. My suggestion: hire a consultant when the cost cannot be managed inside the company.
Second, foreign investors will more likely NOT violently buy and sell equities in Korean companies that hedge. The reason is that if foreign investors are aware that Korean companies are capable of managing foreign exchange risk, that would be a very important reason to remain invested in Korea's great corporations. In the US, one example is Southwest Airlines. The airline industry is very exposed to fluctuations with respect to the price of oil. Southwest Airlines has been a pioneer in using hedging to reduce that exposure, and to focus investors' attention to Southwest Airlines' strategy and execution of its business. Korean often complain that foreign investors buy and sell and buy and sell which causes instability. Well, that exists in every other country as well. In the US, it has been reported that the average holding period of a particular share of stock is 11 SECONDS.
Third, JoongAngIlbo and the International Herald Tribune need to be faster in reporting these developments. It is not only Korean companies that are affected. Many private hospitals in Korea borrow money based on the JPY/KRW exchange rate in order to build their buildings. Plastic surgeons borrow money based on the JPY/KRW exchange rate to lease their expensive equipment. Wealthy individuals have been able to borrow money based on the JPY/KRW exchange rate when taking out a mortgage. Tourism to Korea has, and will continue, to vary greatly based on the strength or weakness of the Korean Won. Newspapers need to inform readers about these effects.
Korean companies can contact The Lost Seoul for derivative expertise, and Korean newspapers should be following the Seoul Gyopo Guide. The Lost Seoul is strictly qualified to provide advice and opinions on these complex matters. The initial consultation is free. One of The Lost Seoul's greatest frustrations is the fact that too often, Korean society is filled with people/companies that "say" that they are experts, when in fact, they are not. For that reason, the initial consultation on any of the business or educational services provided by The Lost Seoul are free of charge. I am that confident. (그 만금 자신이 있습니다. )
Good luck.
www.twitter.com/thelostseoul
thelostseoul@gmail.com
http://joongangdaily.joins.com/article/view.asp?aid=2927280
This article entitled "Few ready for currency war" addressed the risks that a currency war would present to Korean companies. It is true: Korean companies, more than other countries, are vulnerable to volatility in foreign exhange levels.
There are many issues here.
First, foreign exchange movements can be partially hedged. What does this mean? That means that Korean companies can (and should) use financial instruments such as derivatives so that the companies do not suffer deep losses during times of foreign exchange volatility. In the past, Korean companies hoped for volatility because the products were not yet the best when compared to foreign (largely Japanese) competition. THIS IS NO LONGER THE CASE. In the US, the only brand more expensive than a Samsung TV is Sony. And the price differential is not large. In countries outside of the US, that is largely the case. The Seoul Gyopo Guide was created, in part, to recommend these types of strategies. One of the first posts addressed this issue: http://seoulgyopoguide.blogspot.com/2010/09/koreas-reason-for-feasting-this-year.html The problem has been the misuse and/or misunderstanding of derivatives. In the respect, the article is accurate: Korean companies need to increase their knowledge of derivatives if they can help stabilize the companies' operations. My suggestion: hire a consultant when the cost cannot be managed inside the company.
Second, foreign investors will more likely NOT violently buy and sell equities in Korean companies that hedge. The reason is that if foreign investors are aware that Korean companies are capable of managing foreign exchange risk, that would be a very important reason to remain invested in Korea's great corporations. In the US, one example is Southwest Airlines. The airline industry is very exposed to fluctuations with respect to the price of oil. Southwest Airlines has been a pioneer in using hedging to reduce that exposure, and to focus investors' attention to Southwest Airlines' strategy and execution of its business. Korean often complain that foreign investors buy and sell and buy and sell which causes instability. Well, that exists in every other country as well. In the US, it has been reported that the average holding period of a particular share of stock is 11 SECONDS.
Third, JoongAngIlbo and the International Herald Tribune need to be faster in reporting these developments. It is not only Korean companies that are affected. Many private hospitals in Korea borrow money based on the JPY/KRW exchange rate in order to build their buildings. Plastic surgeons borrow money based on the JPY/KRW exchange rate to lease their expensive equipment. Wealthy individuals have been able to borrow money based on the JPY/KRW exchange rate when taking out a mortgage. Tourism to Korea has, and will continue, to vary greatly based on the strength or weakness of the Korean Won. Newspapers need to inform readers about these effects.
Korean companies can contact The Lost Seoul for derivative expertise, and Korean newspapers should be following the Seoul Gyopo Guide. The Lost Seoul is strictly qualified to provide advice and opinions on these complex matters. The initial consultation is free. One of The Lost Seoul's greatest frustrations is the fact that too often, Korean society is filled with people/companies that "say" that they are experts, when in fact, they are not. For that reason, the initial consultation on any of the business or educational services provided by The Lost Seoul are free of charge. I am that confident. (그 만금 자신이 있습니다. )
Good luck.
www.twitter.com/thelostseoul
thelostseoul@gmail.com
S. Korea Government Studying `Several' Measures to Control Capital Flows. 또? 아직도 하나 안배웠습니까?
Today, this article appeared on Bloomberg.com.
http://www.bloomberg.com/news/2010-10-21/s-korea-government-studying-several-measures-to-control-capital-flows.html
The reason for these measures would be to control the rise of the Korean Won against the US dollar. This article has pointed out that the Korean Won has increased by 6.6% over the recent past, which would make Korea the 3rd strongest amongst non-Japan Asian countries.
Even Bloomberg has it wrong. Compared to the USD, yes the KRW has appreciated. However, today the EUR/KRW has increased to 1575 from approximately 1480 two months ago. In addition, the JPY/KRW exchange rate has increased to 13.9 from a low of 13.35 in the middle of September. You can read my observation that the elevated JPY/KRW has created for Japan in my post here: http://seoulgyopoguide.blogspot.com/2010/09/koreas-reason-for-feasting-this-year.html
The problem here is that measures to control the foreign exchange rate of countries of Korea's GDP and capital flows almost always fails. Take the Japanese example. Recently, the Yen hasn't weakened at all despite repeated public comments, and foreign exchange intervention by the Bank of Japan. During the financial crisis of 2008, the BOK tried to actually defend its currency but instead, the Won depreciated by approximately 20% from the levels it tried to defend. Why is that? The global capital flows were larger than the amount of intervention. Quite simple, really.
This time, Korea is trying to weaken its currency, in order to keep its competitive advantage in the international marketplace for exports. World-class Korean products are relatively cheap compared to European and Japanese competition already. In addition, Korean citizens will experience a much greater risk of inflation in the near-term. Normally, interest rates need to increased in order to quell inflation. Doing so, when the rest of the world (except Australia) is keeping interest rates steady (and the U.S. is effectively lowering rates), will lead to increased demand for the Won.
Longer-term, the proposals considered by the BOK will weaken Korea's position in the global economy. Unilateral attempts to affect currency levels are not only almost always unsuccessful, but the countries that attempt to do so are perceived to be weak. The Swiss National Bank and BOJ are the two most recent exaples. No one believes in what these institutions are doing any longer. The result of the proposals considered by the BOK would inevitably be that when Korea wants to attract additional capital, it will not be able to spur demand for the KRW quickly enough.
In other words, unnatural measures will lead to unnatural circumstances The victims? Korean citizens.
http://www.bloomberg.com/news/2010-10-21/s-korea-government-studying-several-measures-to-control-capital-flows.html
The reason for these measures would be to control the rise of the Korean Won against the US dollar. This article has pointed out that the Korean Won has increased by 6.6% over the recent past, which would make Korea the 3rd strongest amongst non-Japan Asian countries.
Even Bloomberg has it wrong. Compared to the USD, yes the KRW has appreciated. However, today the EUR/KRW has increased to 1575 from approximately 1480 two months ago. In addition, the JPY/KRW exchange rate has increased to 13.9 from a low of 13.35 in the middle of September. You can read my observation that the elevated JPY/KRW has created for Japan in my post here: http://seoulgyopoguide.blogspot.com/2010/09/koreas-reason-for-feasting-this-year.html
The problem here is that measures to control the foreign exchange rate of countries of Korea's GDP and capital flows almost always fails. Take the Japanese example. Recently, the Yen hasn't weakened at all despite repeated public comments, and foreign exchange intervention by the Bank of Japan. During the financial crisis of 2008, the BOK tried to actually defend its currency but instead, the Won depreciated by approximately 20% from the levels it tried to defend. Why is that? The global capital flows were larger than the amount of intervention. Quite simple, really.
This time, Korea is trying to weaken its currency, in order to keep its competitive advantage in the international marketplace for exports. World-class Korean products are relatively cheap compared to European and Japanese competition already. In addition, Korean citizens will experience a much greater risk of inflation in the near-term. Normally, interest rates need to increased in order to quell inflation. Doing so, when the rest of the world (except Australia) is keeping interest rates steady (and the U.S. is effectively lowering rates), will lead to increased demand for the Won.
Longer-term, the proposals considered by the BOK will weaken Korea's position in the global economy. Unilateral attempts to affect currency levels are not only almost always unsuccessful, but the countries that attempt to do so are perceived to be weak. The Swiss National Bank and BOJ are the two most recent exaples. No one believes in what these institutions are doing any longer. The result of the proposals considered by the BOK would inevitably be that when Korea wants to attract additional capital, it will not be able to spur demand for the KRW quickly enough.
In other words, unnatural measures will lead to unnatural circumstances The victims? Korean citizens.
Wednesday, October 13, 2010
대한민국 원 때문에 일본 경기가 안된다. 불평 했는데....
It is not large news in the international press, but make no mistake: the JPY/KRW foreign exchange rate is making Japan very uncomfortable, and now the G20 meeting in Seoul could potentially be the location of even further confrontation.
http://uk.reuters.com/article/idUKTRE69C0EI20101013?feedType=RSS&feedName=businessNews&utm_source=twitterfeed&utm_medium=twitter&utm_campaign=DTN+Financial:
The South Korean President Lee Myung-Bak has joined the conversation:
http://news.yahoo.com/s/afp/20101013/bs_afp/skoreag20summiteconomyforex?utm_source=twitterfeed&utm_medium=twitter&utm_campaign=DTN+Financial+News:
On September 20, I posted the following, which explained why Korean companies are doing well these days in international markets.
http://seoulgyopoguide.blogspot.com/2010/09/koreas-reason-for-feasting-this-year.html
The problem with the JPY strength in the world is that Japanese companies' products are getting more expensive and less profitable in the international markets everyday. Any demand from China, the US, or Europe is more likely going for Korean, and other Asian-made products. The Bank of Korea (BOK) has, since the financial crisis began, has acted to keep the KRW weak relative to the USD because it has correctly determined that the global demand for products is fragile. Nevertheless, it will be very interesting to see if the BOK gives in to international pressure which is pushing for a stronger KRW.
It isn't likely that this rhetoric from Japan will cease until the JPY/KRW exchange rate declines.
http://uk.reuters.com/article/idUKTRE69C0EI20101013?feedType=RSS&feedName=businessNews&utm_source=twitterfeed&utm_medium=twitter&utm_campaign=DTN+Financial:
The South Korean President Lee Myung-Bak has joined the conversation:
http://news.yahoo.com/s/afp/20101013/bs_afp/skoreag20summiteconomyforex?utm_source=twitterfeed&utm_medium=twitter&utm_campaign=DTN+Financial+News:
On September 20, I posted the following, which explained why Korean companies are doing well these days in international markets.
http://seoulgyopoguide.blogspot.com/2010/09/koreas-reason-for-feasting-this-year.html
The problem with the JPY strength in the world is that Japanese companies' products are getting more expensive and less profitable in the international markets everyday. Any demand from China, the US, or Europe is more likely going for Korean, and other Asian-made products. The Bank of Korea (BOK) has, since the financial crisis began, has acted to keep the KRW weak relative to the USD because it has correctly determined that the global demand for products is fragile. Nevertheless, it will be very interesting to see if the BOK gives in to international pressure which is pushing for a stronger KRW.
It isn't likely that this rhetoric from Japan will cease until the JPY/KRW exchange rate declines.
Tuesday, September 21, 2010
Gangnam Real Estate: Time to Buy? Just Maybe....
Cheong Da Wae is worried about Korean Real Estate Prices
It is true. The Blue House isn't thrilled about the BOK's raising of interest rates, because Cheong Da Wae knows that the single most important factor on real estate prices is the interest rate charged on mortgages. There is no doubt that real estate prices have flattened, if not declined, especially in Gangnam. Even the prices of Eunma in Daechi-dong, a bellweather of sorts, have dipped slightly, desptie the widely anticipated reconstruction of the the sprawling apartment complex.
There are many complex dynamics in play
It is indisputable that interest rates affect real estate prices. In addition, there are also a few other factors to consider. The subsidies offered at the new developments outside of Seoul (신도시) have made Seoul real estate seem very expensive. Given the dependence of the home-buying generation on their parents, Seoul real-estate, especially in the five speculative areas, seems out of reach, and out of reason.
In addition, the bottom line is that the average age of the population is rising, and rapidly. It is a well-know, commonly-held belief that Korea mirrors Japan's economy, except that Korea is 10 years behind. Well, if that is the case, the Korea is in for a world of hurt (Englsih phrase that you should learn if you do not know it already). With little/no faith in the National Pension Service, the elderly want to save, and the home-buying generation knows it. The result? Less demand.
Of course there are countervailing factors. One is the lust for education. Have you ever been to Eunma? You must be kidding. It is decrepit and needs immediate reconstruction. There is no hot water oince a month. The parking is absolutely untenable. Why then are prices even where they are? One word says it all: HAGWON. One hagwon owner (참부자) called Daechi-dong the "Silicon Valley" of the educational system in Korea. Math hagwons have students coming from (강북) north of the river which must take 30-40 minutes by car. Debating whether or not this is pure insanity will be the topic of another blog entry. Nevertheless, the fact is that Gangnam is host to the nation's most famous hagwons, and fame for Koreans is everything.
Over the long run, demographics will create a drag on the market. Korea's population is like Japan's 20 years ago. Slowing birth rate has led to a increase in the average age of Korea's population. The elderly are less likely to live in the most congested areas.
The level of the KOSPI and the JPY/KRW exchange rate are overlooked and important
Korea is changing, and rapidly. So too, are the people.
It is undeniable, and regrettable in some respects, that the Chaebols have regainted their control, and increased their importance. The over-borrowing, over-dependence by Korean banks on a select few Chaebols has dramatically declined, which is good. That has been the result of increased regulations. In turn, those regulations have increased the transparency of Korean Chaebols (relatively speaking). That has resulted in far greater shareholder rights compared to the 1908s. Why does this matter? It matters because shareholders have greater confidence in the numbers that the Chaebols are reporting, and are less fearful of dilution that has so frequently occured in the past. So, it is a fact that increased shareholder rights has given investors increased confidence in other asset classes, when compared to real estate. This is actually a good sign about corporate governance in Korea, and has been long overdue. As Koreans become more sophisticated investors, and as corporate governance improves, those newly-educated investors will reallocate resources away from the real estate market (their apartments) and into stocks, bonds, and other investments. This can change rapidly because information travels at lightspeed in Korea, and trends turn into fads. Those fads can be strong enough to influence behavior drastically. Therefore, this dynamic must be closely watched in the months and years ahead.
The JPY/KRW exchange rate has hurt Korean real estate prices
How is this possible? You may ask this question and with good reason. Well, a not-well-known fact about Korea is that the rich can behave like small Korean companies just before the Financial Crisis of 2007. In what way? Well, Koreans can borrow with the repayment plans being Yen-based. Huh? Because the Yen interest rates are low compared to Korea, rich Koreans (like the ones that buy expensive Gangnam real estate) have been able to borrow at the low Japanese Yen-based rates, and pay back according the to the value of the Yen. While on the surface that sounds like it was a good idea, the problem is that the Yen has appreciated by over 30% compared to the Korean Won over the past 2 years. That means that the borrowers (the Korean rich) has to pay back 30% more. These types of loans (which are made to finance offices, or plastic surgery laser equipment) are usually 2-3 years long. Guess what? Many are coming due now, and over the next year, and the borrowers must be under great duress, because unless business has improved by an amount greater than the Yen's appreciation, the borrowers may have a very difficult time in repaying these loans. One possible way to repay the loans? Sell real estate, or take additional loans against the value of their apartments. The result of either, or both, of these is clear: lower demand for Gangnam real estate. Prices follow the lower demand, i.e. prices are under pressure.
Given the JPY/KRW appreciation almost cannot last, now may actually be the time to buy
The oldest saying in buying anything of value is to "buy low, sell high." given the fact that most of the economic activity of Korea is in Seoul, and within Seoul, that means Gangnam, when added to the JPY/KRW appreciation which has pressured borrowers that would otherwise be investors or purchasers of Gangnam real estate, it may be a chance to now "buy low."
This is not without risks. There is speculation that the reason for the JPY appreciation is the Chinese who have been huge buyers of JGBs (Japanese Government Bonds). In order to buy, Chinese Yuan is sold, and JPY are bought, and then used to purche the JGBs. The current maritime dispute has made the Chinese angry, some suggest that they are trying to squeeze the Japanese further, and make the Japanese strife worse. In other words, it may be early to buy Korean real estate on this basis at the current time. However, the fact is that once the problem corrects itself, it will most likely not be gradual, but a quick re-alignment may well occur. If that occurs, then the opportunity will vanish. So, for those that have the means, then ironically, this may be a golden opportunity.
Betting Against the Government is a Dangerous Gambit
The Korean government, whether that is local or national, have the same goal: rising real estate prices. It is obvious why. Higher real estate valuations means that higher property taxes can be levied. In addition, the wealth effect of increasing value of homes leads to much better consumer spending. That consumer spending is of particular concern to countries like export-dominated Korea. It needs to weaken the reliance on exports, relatively speaking. That process would all come to stunning, painful halt, if there is a real estate market crash. If you look at the U.S. experience, the rapid decline in housing has led to dramatically painful economic consequences, including unemployment of greater than 9.5%. Other, more appropriate statistics actually point out a worse picture than that. While Korea's official unemployment rate is very low compared to the U.S., it could be argued that underemployment (people working at jobs for which they are vastly overqualified), when added to unemployment, in Korea is actually worse than that of the U.S. No official statistics really point this out in Korea, but anecdotal evidence and the size of the black market economy is the obvious evidence.
The bottom line: Korea can't afford a real estate market crash, and the government will do almost anything in order to prevent one. Given that fact, and the fact that prices are this depressed given the otherwise relatively-healthy economy, which has resulted largely from the appreciation of the JPY, that when this reverses, then money will flow out of equites, out of the JPY due to Japan's efforts (coordinated or not), and that money will go...back into real estate. That is an entirely feasible outcome over the medium term. In the longer term (5+) years, the demographics, and the re-allocation of overall assets by people with savings in Korea, will most likely dominate. But before then, it will be difficult for the government to reverse course from its real estate market support activities.
Good luck.
It is true. The Blue House isn't thrilled about the BOK's raising of interest rates, because Cheong Da Wae knows that the single most important factor on real estate prices is the interest rate charged on mortgages. There is no doubt that real estate prices have flattened, if not declined, especially in Gangnam. Even the prices of Eunma in Daechi-dong, a bellweather of sorts, have dipped slightly, desptie the widely anticipated reconstruction of the the sprawling apartment complex.
There are many complex dynamics in play
It is indisputable that interest rates affect real estate prices. In addition, there are also a few other factors to consider. The subsidies offered at the new developments outside of Seoul (신도시) have made Seoul real estate seem very expensive. Given the dependence of the home-buying generation on their parents, Seoul real-estate, especially in the five speculative areas, seems out of reach, and out of reason.
In addition, the bottom line is that the average age of the population is rising, and rapidly. It is a well-know, commonly-held belief that Korea mirrors Japan's economy, except that Korea is 10 years behind. Well, if that is the case, the Korea is in for a world of hurt (Englsih phrase that you should learn if you do not know it already). With little/no faith in the National Pension Service, the elderly want to save, and the home-buying generation knows it. The result? Less demand.
Of course there are countervailing factors. One is the lust for education. Have you ever been to Eunma? You must be kidding. It is decrepit and needs immediate reconstruction. There is no hot water oince a month. The parking is absolutely untenable. Why then are prices even where they are? One word says it all: HAGWON. One hagwon owner (참부자) called Daechi-dong the "Silicon Valley" of the educational system in Korea. Math hagwons have students coming from (강북) north of the river which must take 30-40 minutes by car. Debating whether or not this is pure insanity will be the topic of another blog entry. Nevertheless, the fact is that Gangnam is host to the nation's most famous hagwons, and fame for Koreans is everything.
Over the long run, demographics will create a drag on the market. Korea's population is like Japan's 20 years ago. Slowing birth rate has led to a increase in the average age of Korea's population. The elderly are less likely to live in the most congested areas.
The level of the KOSPI and the JPY/KRW exchange rate are overlooked and important
Korea is changing, and rapidly. So too, are the people.
It is undeniable, and regrettable in some respects, that the Chaebols have regainted their control, and increased their importance. The over-borrowing, over-dependence by Korean banks on a select few Chaebols has dramatically declined, which is good. That has been the result of increased regulations. In turn, those regulations have increased the transparency of Korean Chaebols (relatively speaking). That has resulted in far greater shareholder rights compared to the 1908s. Why does this matter? It matters because shareholders have greater confidence in the numbers that the Chaebols are reporting, and are less fearful of dilution that has so frequently occured in the past. So, it is a fact that increased shareholder rights has given investors increased confidence in other asset classes, when compared to real estate. This is actually a good sign about corporate governance in Korea, and has been long overdue. As Koreans become more sophisticated investors, and as corporate governance improves, those newly-educated investors will reallocate resources away from the real estate market (their apartments) and into stocks, bonds, and other investments. This can change rapidly because information travels at lightspeed in Korea, and trends turn into fads. Those fads can be strong enough to influence behavior drastically. Therefore, this dynamic must be closely watched in the months and years ahead.
The JPY/KRW exchange rate has hurt Korean real estate prices
How is this possible? You may ask this question and with good reason. Well, a not-well-known fact about Korea is that the rich can behave like small Korean companies just before the Financial Crisis of 2007. In what way? Well, Koreans can borrow with the repayment plans being Yen-based. Huh? Because the Yen interest rates are low compared to Korea, rich Koreans (like the ones that buy expensive Gangnam real estate) have been able to borrow at the low Japanese Yen-based rates, and pay back according the to the value of the Yen. While on the surface that sounds like it was a good idea, the problem is that the Yen has appreciated by over 30% compared to the Korean Won over the past 2 years. That means that the borrowers (the Korean rich) has to pay back 30% more. These types of loans (which are made to finance offices, or plastic surgery laser equipment) are usually 2-3 years long. Guess what? Many are coming due now, and over the next year, and the borrowers must be under great duress, because unless business has improved by an amount greater than the Yen's appreciation, the borrowers may have a very difficult time in repaying these loans. One possible way to repay the loans? Sell real estate, or take additional loans against the value of their apartments. The result of either, or both, of these is clear: lower demand for Gangnam real estate. Prices follow the lower demand, i.e. prices are under pressure.
Given the JPY/KRW appreciation almost cannot last, now may actually be the time to buy
The oldest saying in buying anything of value is to "buy low, sell high." given the fact that most of the economic activity of Korea is in Seoul, and within Seoul, that means Gangnam, when added to the JPY/KRW appreciation which has pressured borrowers that would otherwise be investors or purchasers of Gangnam real estate, it may be a chance to now "buy low."
This is not without risks. There is speculation that the reason for the JPY appreciation is the Chinese who have been huge buyers of JGBs (Japanese Government Bonds). In order to buy, Chinese Yuan is sold, and JPY are bought, and then used to purche the JGBs. The current maritime dispute has made the Chinese angry, some suggest that they are trying to squeeze the Japanese further, and make the Japanese strife worse. In other words, it may be early to buy Korean real estate on this basis at the current time. However, the fact is that once the problem corrects itself, it will most likely not be gradual, but a quick re-alignment may well occur. If that occurs, then the opportunity will vanish. So, for those that have the means, then ironically, this may be a golden opportunity.
Betting Against the Government is a Dangerous Gambit
The Korean government, whether that is local or national, have the same goal: rising real estate prices. It is obvious why. Higher real estate valuations means that higher property taxes can be levied. In addition, the wealth effect of increasing value of homes leads to much better consumer spending. That consumer spending is of particular concern to countries like export-dominated Korea. It needs to weaken the reliance on exports, relatively speaking. That process would all come to stunning, painful halt, if there is a real estate market crash. If you look at the U.S. experience, the rapid decline in housing has led to dramatically painful economic consequences, including unemployment of greater than 9.5%. Other, more appropriate statistics actually point out a worse picture than that. While Korea's official unemployment rate is very low compared to the U.S., it could be argued that underemployment (people working at jobs for which they are vastly overqualified), when added to unemployment, in Korea is actually worse than that of the U.S. No official statistics really point this out in Korea, but anecdotal evidence and the size of the black market economy is the obvious evidence.
The bottom line: Korea can't afford a real estate market crash, and the government will do almost anything in order to prevent one. Given that fact, and the fact that prices are this depressed given the otherwise relatively-healthy economy, which has resulted largely from the appreciation of the JPY, that when this reverses, then money will flow out of equites, out of the JPY due to Japan's efforts (coordinated or not), and that money will go...back into real estate. That is an entirely feasible outcome over the medium term. In the longer term (5+) years, the demographics, and the re-allocation of overall assets by people with savings in Korea, will most likely dominate. But before then, it will be difficult for the government to reverse course from its real estate market support activities.
Good luck.
Monday, September 20, 2010
Korea's Reason for Feasting This Year: The Yen's Strength
Chuseok is here and Korea is Feasting...because of the Japanese Yen
Well, it is Chuseok (추석) season, which begins tomorrow, September 21st, and lasts for 3 days. This year, Korea's economy has to be especially thankful for one thing: the Japanese Yen's incredible strength. There is little doubt that Korea has feasted on the decline of Japan's influence on the world.
Two years ago, the JPY/KRW exchange rate: 10
Now: 13.40
To those of you that don't know, it means the following: a Japanese product is now 34% more expensive, or less profitable than the same product made in Korea. Well, what types of products might those be? Try automobiles, ships, steel, and electronics. Guess what Hyundai Motor, Hyundai Heavy, POSCO, and Samsung Electronics sell? Who are their main competitors on a global basis? Japanese in every case. So, there is no doubt about why Japanese companies are bitterly complaining to the Bank of Japan. For the moment, it has been effective: the JPY/KRW exchange rate was over 14.25 just a week ago.
What does this mean for Korea going forward?
It is rare for the world to compliment both the corporate sector and the government, but this may in fact be true in Korea's case. The government has been slow to reduce fiscal stimulus measures, and the Bank of Korea has responded to inflationary pressures by slowing increasing interest rates. So while the demand for imports into the U.S. and China has waned, the JPY/KRW rate has kept Korean-made products very competitive, and now, as we all know, Korean-made products are, as a whole, on par if not superior to their Japanese-made counterparts.
Derivatives the ugly word are most likely a partial solution.
Derivatives in Korea have left particularly ugly scars. During the Asian currency crisis, Korean securities firms were heavily invested in speculative, leveraged investments linked to the Thai Baht. During the Financial Crisis of 2007, Korean companies were found to have owned KIKO (Knock-In, Knock-Out) derivatives on the Japanese Yen.
In today's case, it is the writer's view that Korean corporations need to get hedged, at least in part. There is no way to tell, given the relatively weak global economic recovery, whether or not demand for Korean-made products will continue, and more importantly, how much of this demand is due simply due to the appreciation of the Yen. Korean companies need some protection in case the Yen declines, and Korean-made products become relatively expensive and do not sell.
Notably, the carry trade would suggest that the Yen may in fact decline at the time that there is more optimism in financial markets as a whole. That is what has confounded many experts in the market. Equity markets globally are not far from their highs, and yet the Japanese Yen is near its greatest levels in 15 years.
What does this means? Either Korean-made products will continue to grow, and the Yen may or may not appreciate. Or Korean-made products' sales will decline, as a result of either a global economic slowdown, or a depreciating Yen. The worst case would be if the Yen depreciates, and Korean-made products' sales decline by more than would be anticipated due to a global economic slowdown. It is this case that needs to be hedged in part.
The days of Korean products needing to be cheaper in the global marketplace no longer exists. In every major industry, Korea's products are competitive with other nations', at nearly every level. As a result, Korea's companies shouldn't take extra risk by hoping that the JPY/KRW continues to be at such high levels. Korean companies need to buy some puts on the JPY/KRW (that appreciate when the JPY/KRW level declines). They should buy a partial hedge, which will cost money, but will provide protection against unfavorable moves.
No one knows exactly what will happen, but one thing is for certain: the global economy is, and will contiune to have strange relationships due to the aftermath of the Financial Crisis. Korean companies should take advantage of the sharp increase in JPY/KRW, with the knowledge that it, over the multiple-year horizon, will most likely not last.
Well, it is Chuseok (추석) season, which begins tomorrow, September 21st, and lasts for 3 days. This year, Korea's economy has to be especially thankful for one thing: the Japanese Yen's incredible strength. There is little doubt that Korea has feasted on the decline of Japan's influence on the world.
Two years ago, the JPY/KRW exchange rate: 10
Now: 13.40
To those of you that don't know, it means the following: a Japanese product is now 34% more expensive, or less profitable than the same product made in Korea. Well, what types of products might those be? Try automobiles, ships, steel, and electronics. Guess what Hyundai Motor, Hyundai Heavy, POSCO, and Samsung Electronics sell? Who are their main competitors on a global basis? Japanese in every case. So, there is no doubt about why Japanese companies are bitterly complaining to the Bank of Japan. For the moment, it has been effective: the JPY/KRW exchange rate was over 14.25 just a week ago.
What does this mean for Korea going forward?
It is rare for the world to compliment both the corporate sector and the government, but this may in fact be true in Korea's case. The government has been slow to reduce fiscal stimulus measures, and the Bank of Korea has responded to inflationary pressures by slowing increasing interest rates. So while the demand for imports into the U.S. and China has waned, the JPY/KRW rate has kept Korean-made products very competitive, and now, as we all know, Korean-made products are, as a whole, on par if not superior to their Japanese-made counterparts.
Derivatives the ugly word are most likely a partial solution.
Derivatives in Korea have left particularly ugly scars. During the Asian currency crisis, Korean securities firms were heavily invested in speculative, leveraged investments linked to the Thai Baht. During the Financial Crisis of 2007, Korean companies were found to have owned KIKO (Knock-In, Knock-Out) derivatives on the Japanese Yen.
In today's case, it is the writer's view that Korean corporations need to get hedged, at least in part. There is no way to tell, given the relatively weak global economic recovery, whether or not demand for Korean-made products will continue, and more importantly, how much of this demand is due simply due to the appreciation of the Yen. Korean companies need some protection in case the Yen declines, and Korean-made products become relatively expensive and do not sell.
Notably, the carry trade would suggest that the Yen may in fact decline at the time that there is more optimism in financial markets as a whole. That is what has confounded many experts in the market. Equity markets globally are not far from their highs, and yet the Japanese Yen is near its greatest levels in 15 years.
What does this means? Either Korean-made products will continue to grow, and the Yen may or may not appreciate. Or Korean-made products' sales will decline, as a result of either a global economic slowdown, or a depreciating Yen. The worst case would be if the Yen depreciates, and Korean-made products' sales decline by more than would be anticipated due to a global economic slowdown. It is this case that needs to be hedged in part.
The days of Korean products needing to be cheaper in the global marketplace no longer exists. In every major industry, Korea's products are competitive with other nations', at nearly every level. As a result, Korea's companies shouldn't take extra risk by hoping that the JPY/KRW continues to be at such high levels. Korean companies need to buy some puts on the JPY/KRW (that appreciate when the JPY/KRW level declines). They should buy a partial hedge, which will cost money, but will provide protection against unfavorable moves.
No one knows exactly what will happen, but one thing is for certain: the global economy is, and will contiune to have strange relationships due to the aftermath of the Financial Crisis. Korean companies should take advantage of the sharp increase in JPY/KRW, with the knowledge that it, over the multiple-year horizon, will most likely not last.
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